A House Divided Against Itself Cannot Spend (as Much): The Fiscal Effect of Separate Taxing and Spending Committees in State Legislatures

Abstract

In recent years, a raft of studies has examined the effect of various institutions on state fiscal outcomes, especially per capita spending. A review of the literature reveals that one institution has an especially large effect on government spending: states with separate legislative committees overseeing taxing and spending legislation spend significantly less than stateswithout separate committees. The size of this effect was found to be an order of magnitude larger than that of any other institution. Despite this large effect, separate committees are one of the least studied state institutions. We found only one peer-reviewed study of separate taxing and spending committees, and it was based on data from a relatively short time period in the 1980s. We offer the first formal theoretical model of the institution, emphasizing the important role that transaction costs play in political logrolls. We empirically test the model, improving on the previous test with a longer panel (spanning 40 years), a larger set of controls, separate tests on different measures of fiscal policy, and tests to learn whether it makes a difference if taxing and spending committees are separate in one or both legislative chambers. Controlling for other factors, we find that states with separate taxing and spending committees spend between $300 and $450 less per capita than states without separate committees. Having these functions separate in one chamber seems to have a larger effect than having them separate in both chambers. Moreover, the pattern does not hold for all subcategories of state spending.